Venture capital funding drops 81%

Venture capital funding plummeted more than 80 percent during the third quarter, as investors clung to their cash in the wake of the Great Recession.

U.S. firms raised just $1.6 billion during the third quarter, the lowest amount since the first quarter of 2003, according to a joint report by Thomson Reuters and the National Venture Capital Association this morning.

That’s an 81 percent drop from a year ago, when 63 firms raised nearly $8.5 billion. It was also a decline from the preceding quarter, when 27 funds raised almost $2 billion.

Investors “are still very ambivalent about getting back into alternative assets in general and venture specifically,” said Mark Heesen, president of the NVCA. “There’s some lingering shock over the economic downturn and a lot of these traditional limited partners don’t have money to put into new deals right now.”

Only seventeen venture capital funds raised money during the last three months, the smallest number since the third quarter of 1994. Those included four new funds and 13 so called follow-on funds.

Khosla Ventures raised the most money during the quarter, a $750 million follow-on fund earmarked for early stage companies. Draper Fisher Jurvetson ranked a distant second, with $196 million in commitments.

The largest inaugural fund during the quarter was the $58.5 million closed by Andreessen Horowitz. It was the final round of closed investments for the venture capital firm, which Netscape co-founder Marc Andreessen and business partner Ben Horowitz launched this summer with $300 million in commitments.

There is some anecdotal evidence that investors are growing more confident about the venture capital prospects, Heesen said.

“No one’s jumping for joy yet, but there are limited partners who are saying, ‘this is a good time to get back into the market,'” he said. “They may be able to get terms that, frankly, they couldn’t get in the past.”

He said funding isn’t likely to increase until 2010 and even then, it’s likely to be a slow recovery.